"Safe" is a relative term for food stocks

CHICAGO (Reuters) - The idea that stocks in food companies are a safe haven because people always have to eat is being put to the test in a world shocked by recession fears.

People still need to eat, but they do not necessarily have an appetite for higher-priced branded foods. That is forcing investors to pick and chose which food stocks provide safety.

But the things investors typically prize about food companies in a bear market -- such as stable, predictable cash flow -- remain in place, and the recent slide in the market makes for some attractive investments, analysts said.

"The door is open to pursue best-of-breed companies without paying best-of-breed prices," Edward Jones food analyst Matt Arnold said,

Still, while food companies may also benefit as prices for wheat, oil and other commodities fall from historically high levels, companies with weaker brands might be forced to give up some of the price increases that have lifted their sales.

"It's not like you can go into the food stocks in a secular bear market and make money where other stocks are losing money, or else everybody would own them," said Matthew Kaufler, a portfolio manager at Touchstone Value Opportunities Fund.

The Standard & Poor's U.S. packaged foods index has fallen about 14 percent in October, compared with a 24 percent drop by the S&P 500.

That difference in itself shows that the market thinks that while everyone will feel some pain in a global slowdown, the amount of "pain" is relative.

"The pressure that Coke and Pepsi might feel is going to be a lot different than a major steel producer," Morningstar analyst Gregg Warren said.

Both Coca-Cola Co and PepsiCo are in "five-star territory" at Morningstar, meaning they are stocks that are trading below what Morningstar sees as fair value by enough of a margin to give some safety.

Other stocks that fit that category are Nestle and Kraft Foods Inc, while Kellogg Co and Campbell Soup Co are "getting close," Warren said.

Kraft trades at about 14 times forecast 2009 earnings and is seen by other analysts as an investment that is becoming more attractive.

The company has spent several years closing factories, cutting fixed costs and spending more on advertising and new product development. The latter has paid off in higher sales and some analysts think the company is priced right.

"It's a business that is showing evidence of hitting its stride," Edward Jones's Arnold said.

Kaufler cited General Mills Inc as attractive.

"I've always admired their brand portfolio," Kaufler, whose funds owns Kraft, HJ Heinz Co and McDonald's Corp, said.

But General Mills trades at about 17 times fiscal 2009 earnings and though the multiple is skewed because General Mills has a mid-year fiscal year-end, the multiple is less attractive than other food stocks, Warren said.

"There's better opportunities within the group," he said.

Many food companies have battled soaring commodity costs over the past two years. Those costs are, for the most part, abating. But so might the price increases that the food companies took to cope with the costs.

The power of Wal-Mart and consolidation in the food industry will make it harder for food companies to maintain the higher prices, at least in some categories like cheese, bread and canned fruits and vegetables that have a lot of competition from lower-priced store brands, analysts said.

Several U.S. food companies have also pushed more into emerging markets lately -- markets that seem more vulnerable in a global downturn.

But analysts said that most of the companies have yet to make substantial enough inroads in countries like Russia, Indonesia and other emerging markets to be hurt too much if those economies turn south.

"I don't think it dries up. It may, at the margin, slow a bit," Kaufler said of revenue from those emerging markets.

(Editing by Gary Hill)